‘On fire’

| December 1, 2017

Heat-not-burn products continue their conquest of Japan.

By George Gay

There has been so much written about the arrival in Japan of heat-not-burn (HNB) products that it seems trite to say that they have enjoyed phenomenal success there. But I’ll say it anyway: They have enjoyed phenomenal success there.

To give a flavor of what has been going on: In May, a Reuters story had Japan Tobacco’s (JT) president and CEO, Mitsuomi Koizumi, admitting that he had not foreseen the success of Philip Morris International’s (PMI) iQOS HNB device, which the previous month had captured about 10 percent of the Japanese cigarette market, up from 7.6 percent in January. At that time, JT was predicting that its combustible cigarette (hereafter cigarette) volume sales would be down by about 9.6 percent during the full year 2017. “It’s shocking,” Reuters quoted Koizumi as saying. “I am doing this business for more than 35 years, but I have never experienced losing 10 percent in volume in one year.”

But it was only going to get worse from JT’s point of view. When, on Nov. 1, Koizumi presented his company’s results for the third quarter to the end of September, he said that the continuing cigarette volume decline was putting further pressure on JT’s domestic tobacco business, making it necessary to adjust full-year forecasts. One of those adjustments had JT’s domestic cigarette volume sales falling by 13.4 percent over the full year.

Meanwhile, in presenting in July British American Tobacco’s (BAT) results for the six months to the end of June, CEO Nicandro Durante said that BAT had made good progress with its next-generation product business and was now present in 15 markets worldwide with its vapor products and Glo, its tobacco-heating product (THP). “In the Japanese city of Sendai, Glo continues to perform exceptionally well, reaching an estimated eight percent share and with one in three smokers in Sendai having purchased Glo,” he said. “We have recently expanded our coverage to Tokyo, Miyagi and Osaka, and national rollout in Japan is planned for October 2017. While it remains early days, the initial results in Tokyo are excellent, with performance ahead of [that of] Sendai over the same period.”

Also in July, PMI’s CEO, Andre Calantzopoulos, in presenting his company’s second quarter results to the end of June, said that shipments of Marlboro HeatSticks—the consumable element of iQOS—during the quarter had represented more than 40 percent of PMI’s total shipments in Japan. And in an interview with Nikkei Asian Review he said that, due to the rapid takeup of alternative tobacco devices in Japan and South Korea, PMI was looking to begin talks with governments within five years on phasing out cigarettes.

Ploom Tech

The time frame was based apparently on projections of when the number of people using “new smoke-free devices” would overtake the number of people smoking traditional cigarettes in those two countries. “If you extrapolate the figures, then logically we could reach the tipping point in five years,” Calantzopoulos reportedly told the Nikkei Asian Review during an interview in Seoul, South Korea. “That is when we could start talking to governments about phasing out combustible cigarettes entirely.”

It is important to bear in mind, also, that the success that HNB products have had in Japan has been tempered by capacity restraints, especially in respect of JT’s Ploom Tech device, which is having to play catch-up from a long way back. So the question arises as to how much of the Japanese cigarette market these products would have grabbed if it had not been for these constraints.

But other questions arise, too. When this report was being written, the government was mulling over a cigarette tax increase as a way of paying for that part of promised additional spending on education and child health care that couldn’t be funded by a consumption tax increase because of concessions that it needed to make in applying that increase. Formal discussions on tax reform were not due to start until Nov. 22, after this story was written, but, presumably, a stand-alone cigarette tax increase would be likely to accelerate the switch from cigarettes to HNB devices. But such a stand-alone cigarette tax seems unlikely. Those looking at taxes in the round will not be unaware of the already rapid changes that are taking place in Japan’s tobacco and nicotine markets, and it seems unlikely that HNB products will avoid the eye of the ministry of finance. As things stand, the ministry is de facto allowing HNB product manufacturers to pick up revenue being lost to the treasury, and that is not a situation it is likely to allow to continue.

As I understand it, the business model of HNB products is supposed to work even if the tax on these products is set at the same level as that on cigarettes. Nevertheless, it is hard not to conclude that if taxes were harmonized in this way, a brake would be applied at the very least to the rate at which the market share of HNB products was advancing. This is not a given, however. Some argue that the success of these products in Japan is down in no small part to cultural factors. Of course, if this is true, it has repercussions for other markets, but that is outside the scope of this piece.

Yet another question arises. I wonder also whether the success enjoyed by HNB products and the presumably noticeable fall in the number of smokers has emboldened anti-tobacco activists. And if so, will their activities prompt even more smokers in Japan to make the change from cigarettes to HNB products and, in turn, further embolden anti-tobacco activists?

Swatting fireflies

Writing on Japanese news blog RocketNews24 in August, Casey Baseel said that while Japan was often referred to as a smoker’s paradise, times were changing, leading to discussions about placing new limits on when and where Japanese smokers could light up. Baseel cited the Neighborhood Second-Hand Smoke Victims Society (NSSVS), which is based in Yokohama, Japan, and taking aim at people referred to as “firefly” smokers—smokers who go onto their apartment balconies at night to smoke, and the tips of whose cigarettes are said to resemble the luminescent insects. Baseel implied that, up to now, this was largely something for which the only recourse was to say nothing could be done. But with smoking rates dropping and greater awareness of the health risks associated with secondhand smoke, he said, people who were unhappy about a firefly smoker living below them had become more vocal. The NSSVS was seeking national or local requirements so that, in the case of a complaint about a firefly smoker, landlords and building managers would be obligated to take action to rectify the situation.

JT’s headquarters in Tokyo

What is interesting here is the anti-smoking leap that is being made. In a country that seems to be out of step with many other rich countries when it comes to smoking bans, activists are attempting to enter smokers’ homes, or at least their properties, which is something that is only just happening in countries that, unlike Japan, have long-established public smoking bans. Japan is a country where, earlier this year, the Ministry of Health, Labor and Welfare said it could not comply with requests for further exemptions to its public places smoking ban proposal because Japan would rank second to last on a four-tier World Health Organization scale even under the-then current proposal. The smoking ban is being pursued by some because Japan is to host the Summer Olympics in 2020.

Meanwhile, by October, activists had entered the home, or at least they had in Tokyo. A story in the Japan Times told how a bylaw aimed at protecting children from passive smoking had been enacted by the Tokyo Metropolitan Assembly. What was said to be the first prefecture-level measure of its kind called on people not to smoke inside rooms or vehicles in which children under 18 were present. The bylaw, which carries no threat of penalties for violators, called on residents of Tokyo to try to ensure that children were not subjected to passive smoking anywhere. It called on parents not to smoke in rooms where children were present. Parents were urged not to let children enter facilities that had no measures to prevent passive smoking or designated smoking sections. In addition, the bylaw called on people not to smoke inside cars in which children were riding, on streets near parks, plazas, schools and facilities promoting children’s welfare, as well as similar facilities. And it called on people not to smoke on streets within seven meters of pediatric clinics or dental clinics for children.

Companies are getting in on the act, too, seemingly feeling that it is their moral duty to save smokers from themselves and non-smokers from smokers. According to another story in Japan Today, at the end of October an increasing number of Japanese companies were stepping up efforts to protect employees from the health hazard of smoking. In June, the story said, the convenience store chain Lawson had introduced an all-day ban on smoking at its head office and all regional offices, with an eye to lowering the ratio of smokers in its workforce by around 10 percentage points by fiscal year 2018, from 33 percent in fiscal year 2016. The ban, however, carries no penalty for violators, and HNB products are not covered. Lawson apparently introduced the ban step by step, starting with a once-a-week nonsmoking day last year. But a public relations officer reportedly said the company was willing to take an even tougher anti-smoking measure in the future.

The public space for smoking is shrinking even in Japan.

Meanwhile, Sompo Japan Nipponkoa Himawari Life Insurance was said to have introduced an all-day smoking ban at its head office and business outlets across Japan. It has converted smoking rooms at its head office into rooms where people may rest, and it is providing subsidies for employees participating in tobacco cessation programs. This is all very well, but there is something that, in my view, is rather unpleasant here. Masayuki Seto, an executive officer of the insurance company, who smoked for 30 years and who was one of the participants in such cessation programs, was quoted as saying, “I am no longer shunned by nonsmokers, as I have rid myself of the odor of cigarette smoke. Moves to quit smoking have spread among staff working under my supervision.”

But the most interesting company intervention, in my view, was described in a story in The Telegraph (Japan) at the end of October, which told how a marketing company based in Tokyo was giving its nonsmoking employees six more paid holidays a year than it was giving to their smoking colleagues. The nonsmokers had apparently complained that they were working more than were workers who took time off for cigarette breaks.

This story was picked up by a number of media outlets, and Matthew Haag, writing in The New York Times, said that nonsmokers at the agency had complained about the unfairness [my emphasis] of this situation. I take it that the company agreed that this situation was unfair, worked out how much time a smoker spent outside smoking during a year and added that amount of time to the annual holiday entitlement of nonsmokers.

But I don’t think that it is a given that the situation that existed was unfair, nor that the remedy was fair. For instance, if the company in question wasn’t required by law to make its smokers go outside to indulge their habit, you could argue that what it did wasn’t fair because firstly it forced its smokers to go outside unnecessarily, and then, de facto, penalized them for obeying its orders. And even in the case that the company was required by law to make smokers go outside to smoke, the company is de facto punishing them for obeying the law, which seems odd.

Perhaps HNB products can help get around such unfairness issues, while at the same time providing a less hazardous habit for smokers.

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